For over a year, Russian bankers have looked to the rouble bond market as their personal risk-free Vegas.
Too scared to lend directly to corporates, Russian banks have found they don’t have to – thanks to central bank stimulus measures that allow them to reap risk-free returns of 130 – 170 basis points on rouble paper, simply by borrowing money on the market and buying up central bank bonds.
While the system has functioned well for Russian corporates which have been able to issue $23.1bn in rouble debt this year thanks to falling borrowing costs, economists at Troika Dialog, the Moscow investment bank, warn the situation will soon take its toll on Russia’s financial system.
Russia’s broad monetary base has already grown 46 per cent year-on-year in the first six months of 2010, and the central bank has done nothing to help matters by expanding its bond offerings, they say.
The central bank’s “nice, risk-free” bond offerings give banks ample returns “for doing nothing but simply borrowing on the market [and] inflating [their] balance sheet”, they say. Banks will buy the central bank bonds but use them as collateral simply to borrow more on the market the next day.
After 14 consecutive rate cuts, Alexei Ulyukayev, first deputy chairman of the central bank, says the economy no longer needs the stimulus of rate cuts. Rates may be held for several months, he said. The announcement follows a 1 percentage point cut less than a month ago, taking the refinancing rate to 7.75 per cent. Rates have been cut a total of 525bp from 13 per cent in April of last year.
“On the one hand, inflation is still … easing compared with last year. On the other hand, there is a recovery in the economy, which is becoming more sturdy — this relates both to lending and to industrial output,” Moscow Times reports Mr Ulyukayev saying.
Both short- and medium- term rouble volatility will fall if the central bank gets its way. The Bank of Russia tweaked its currency interventions strategy yesterday, saying it would consider oil prices when working out how many roubles to sell.
A warning was also issued to forex speculators as the Bank said its currency interventions were “directed mainly at neutralising the firm expectations of forex market participants”. Oil price rises can heighten speculation of a rouble rise, as the Russian economy is heavily dependent on the stuff.
The rouble has greatly appreciated in recent months, and the Bank is still cutting interest rates and buying dollars and euros to counter the rise.
The Bank of Russia explained its intervention strategy thus:
The operations of the Bank of Russia on purchases/sales of foreign currency undertaken in excess of the set target volumes are directed at smoothing out the movements in the rouble’s exchange rate which are not determined by the influence of fundamental economic factors.
Raise or hold?
Russia has chosen the third option: cut.
We have moved “way beyond a North-South world” and the World Bank is moving with it.
The message, from Robert Zoellick, World Bank president, came as he called for shareholders to expand developing countries votes at the institution at the opening of the WB/IMF spring meetings.
The central bank of Russia has cut the key refinancing rate to 8.25 from 8.5 per cent. The bank cited a lack of confidence in the recovery. The reduction aims to reduce the cost of borrowing, increase the availability of credit, and boost domestic demand, the bank is reported as saying. The rouble has also been strengthening significantly, and the reduced interest rate will make the currency less attractive to foreign investors.
The blue line on the chart shows the refi rate since January 2007 (left axis). The green line shows the basis point increase/cut per day, derived from the interest rate change and the number of days between cuts (right axis). Today’s cut – effective Monday – shows a very slight increase in the size of the daily cut (chart data).
Russia’s rouble strengthening policy continues, with the lower boundary of its trading band now sitting at 34.65. The rouble is measured against a euro-dollar basket, and it is clear from the chart that the currency has strengthened more consistently against the dollar in the past 10 days.
Reuters is reporting traders who are reporting a $700m central bank purchase of foreign currency, which is an effective rouble sale, pushing down the currency. This is typically married with a 5-kopeck shift of the trading boundary. A kopech is a hundredth of a rouble.
Russia is getting richer. The rouble is gradually being allowed to strengthen, which will allow Russians to import more, addressing their trade surplus. The process is being carefully managed, however, with the central bank cushioning each move.
Local dealers are again reporting a $700m purchase of foreign exchange with a 5 kopeck reduction in the floating rouble band boundary. (A kopeck is one hundredth of a rouble.)
The Russian central bank has agreed to cut its refinancing rate from 8.75 to 8.5 per cent, effective February 24. The main one-day repo rate is down from 6 to 5.75 per cent.
The rouble has been strengthening in recent days, possibly leading to a $2bn sale of the currency by Bank Rossii yesterday.
Russia’s central bank probably bought more than $2bn in foreign currency today to stall the ruble’s advance to the strongest level against its currency basket in almost 14 months, forex trading managers told Bloomberg. The rouble fell below 34.90 against the dollar-euro basket, breaking Bank Rossii’s floating export-friendly target band of 35 to 38. The currency remained within the 26 to 41 band the bank pledged to defend in January. Bank Rossii does not comment on daily or weekly interventions.
Related stories: Russian forex intervention likely, Feb 17